AVCJ: Healthcare funds: Repeat prescription with quotes from Chris Lerner
An assortment of healthcare-focused GPs – most of them in China – have emerged to leverage rising domestic consumption and nascent medical innovation. Does domain expertise mean better deal access? James Huang recently completed his journey from specialist to generalist and back to specialist again. He joined KPCB China from healthcare investor Vivo Ventures in 2011 and has spent the last six years adding a healthcare practice to the firm’s existing technology, media and telecom (TMT) coverage. Last month, Huang decided to go solo, establishing sector specialist GP Panacea and launching a debut fund with a target of $150 million. He continues to manage the existing KPCB China vehicle. The firm differentiates itself from others in the space by focusing on incubating life sciences companies ahead of their first institutional funding rounds. But Huang’s rationale for setting up a sector fund is the same as everyone else: to tap into rising consumption in China. At present, healthcare expenditure amounts to 5.6% of GDP, well below the US level of 17.1%, and these specialist investors want to help close the gap. "As healthcare expenditure as a percentage of GDP continues to expand, the healthcare market in Greater China will grow beyond everyone’s imagination," says Huang. "That’s why it’s good to be healthcare. It is one of the fastest-growing sectors of the economy that you can’t ignore it." It is estimated that 360 healthcare-focused firms – including captive VC units – have been set up in China in recent years. There are also a handful of sector specialists active in other markets across the region, addressing a similar emerging demand dynamic. While the opportunity is undeniable, it remains to be seen whether every specialist can generate sustainable deal flow and build a long track. Asia’s healthcare market is said to be expanding at a rate of 15% per annum, putting it on course to be worth $4.3 trillion by 2030, more than the current scope of the US and Europe combined. Rapid economic growth, an emerging middle class, and an ageing population – as well as government support and deepening industry talent pool in some cases – are the key driving factors. Business Monitor International projects healthcare spending in China to reach $1.8 trillion by 2026, up from $663 billion last year. India will expand from $113 billion to $342 billion over the same period. Total private equity investment in Asian healthcare stands at $9.2 billion so far this year, up from $5.4 billion in 2016. The record high of $12.2 billion came 12 months earlier, although the $3.3 billion privatization of China-based WuXi PharmaTech accounted for more than one third of the total. The average of the previous five years, excluding 2015, is $5.5 billion across 230 transactions, half of themearly stage. China has consistently proved to be the most active market, followed by Australia, India and Japan. More than $3.4 billion has been deployed this year – more than three times and 25 times the India and Southeast Asia totals – in nearly 100 deals. The five-year average, excluding 2015, is about $2.4 billion. "Money follows opportunity. China is a large market with clear demographic trends and visible needs in healthcare. As a result we have seen a proliferation of specialists. The composition of such firms is varied and includes sector team spin-outs from generalist funds and investment teams led or assembled from within the healthcare industry itself," says Chris Lerner, head of Asia at placement agent Eaton Partners. AVCJ Research has records of six established healthcare specialists – Lyfe Capital, C-Bridge, Eight Roads, OrbiMed, Lilly Asia Ventures (LAV) and HighLight Capital – closing US dollar-denominated funds of $250-551 million over the past six months. There are also a number of new entrants in the market, including a team from generalist VC investor Legend Capital.